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Final Accounts for Sole Proprietors - Non-manufacturing

Trading account

Trading account is a statement which is prepared by a business firm. It shows the gross profit of business activities during a specific period. It is a part of the final accounts of the entity. In other words, the trading account gives details of total sales, total purchases and direct expenses relating to purchase and sales. Trading account format for the year contains Particulars, Amount, Dr., Cr., Purchases, Sales, etc. In this article, we will see the advantages of a Trading account and Trading account format.

Trading Account

Trading and manufacturing business firms deal in sales and purchases of goods. Therefore, only manufacturing and trading entities prepare the trading account. Service providers do not prepare this.

Advantages of Preparing Trading Account Format

  • It is a very important statement from the cost point of view of the goods. By preparing the Trading account entities can take the decision for continuing or discontinuing a particular product. It helps to earn the maximum profit or reduce the losses.
  • With the help of a trading account, Sales tax authorities can easily see the correct purchases and correct sales as per the sales tax return submitted by a business firm.

  • It also helps the Excise authorities to assess the excise duties of business firms.
  • The management decides the price of the product with the help of a trading account, after keeping in mind the market competition.

Understand the Concept of Profit and Loss Account here in detail.

Items in Trading Account Format

Trading Account contains the following details

  • Opening stock details of raw material, semi-finished goods and finished goods.
  • Closing stock details of raw material, semi-finished goods, and finished goods.
  • Total purchases of goods fewer Purchase Returns.
  • Total sales of goods fewer Sales Returns.
  • All direct expenses related to purchases or sales or manufacturing of goods.

Trading account format

Items of Income (Cr.) side

  • Total sales of goods fewer Sales returns
  • Closing stock of goods.

Items of expenditure (Dr.) Side

  • Opening stock of goods
  • Total purchases of goods Less purchase returns
  • All direct expenses like Carriage inward & Freight expenses, Rent for godown or factory, Electricity and Power expenses, wages of workers and supervisors, Packing expenses, etc.

Notes

  1. The Trial balance never shows the Closing stock. However, firstly, we need to show the amount of closing stock on the income side of Trading account and secondly, in the balance sheet under current asset.
  2. We value the closing stock at cost or market price, whichever is less.
  3. On the date of preparation of trading account, we value the Closing stock which is physically available.
  4. However, we can prepare the Trading account in horizontal form also but the contents shall remain the same.

Trading Account Format

Particulars Amount Particulars Amount
To opening stock By sales
To purchase Less: Returns
Less: returns By Closing stock
To direct expenses:
Freight & carriage
Custom & insurance
Wages
Gas, water & fuel
Factory expenses
Royalty on production
To Gross profit c/d

Solved Example For You

Prepare a trading account for the year ending March 31, 2016, from the following particulars:

 Particulars Amount Particulars Amount
Stock (April 1, 2015) 20,000 Octroi duty 75
Cash purchases 30,000 Drawings in goods by the proprietor 500
Credit purchases 20,000 Expenses of taking delivery 25
Purchases returns 1,000 Goods are given as charity 100
Cash sales 40,000 Carriage inward 1,450
Credit sales 30,000 Goods are given in samples free of charge 100
Loss of goods by fire 1,500 Goods sent on consignment at cost 1,500
Wages 400 Rent and taxes 500
Returns inwards 2,000 Discount 200
Commission on purchase 100 Commission 400
Closing stock 3,500 Travelling exp. 700

 

Ans:

                                                                      Trading Account

                                             (For the year ending 31st March 2016)

 

Particulars Amount Particulars Amount
To opening stock 20,000 By Goods sent on consignment a/c 1,500
To purchase By sales
Cash purchase     30,000 30000 Cash sales 40000
Credit purchase   20,000 20000 Credit sales 35000
Less: Return outward 1,000 (1000) Less: Return inward (2000) 68000
Drawings 500 (500)
Goods as charity 100 (100)
Goods as sample 100 (100) 48300
To carriage inward 1,450 By P&L A/c (Loss by fire) 1,500
To wages 400 By closing stock 3,500
To commission on purchases 100
To Octroi duty 75
To Expenses of taking delivery 25
To Gross profit transferred to P.&LA/c 4,150
  74,500   74,500

 

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